Capital Flows and Asset Markets

I will admit, I have only started taking a close interest in politics in recent years. Like many of the “elite” I was shocked by the Brexit vote, and the election of Trump. But having spent a few years reading and thinking about politics, every election this year has conformed to exactly the same message - “show me the money”.

The market and the Economist where surprised by recent election results in Mexico, France and India. Working on the received wisdom, of full employment and strong stock markets, France and India should have returned strong pro-government results, and yet in both countries the ruling party suffered reversals. India is the more interesting, as Modi was seen by the Economist as a populist, race-baiting, strong man that the global voting public was ever more favouring. The opposition was seen as lacklustre at best. The election reduced the ruling party lead in seats by over 200.

In Mexico, the surprise was how large was the endorsement of the ruling party. Despite populist ALMO stepping down, his successor garnered even more seats. ALMO and his party was seen as populist, and so in the same boat as Modi. The Economist frets about what all this power for ruling party might do, while ignoring the real message. Voters are screaming “show me the money”. ALMO showed them the money. Modi plainly did not show them the money.

Perhaps even more importantly- ALMO did not make the richest man in Mexico richer. Carlos Slim, who controls America Moviles, has not seen the share price rise over the last 10 years. India’s richest man, Mukesh Ambani, has seen his Reliance Industries soar in value. White line is America Moviles, red line is Reliance Industries.

In France, the richest man in Europe, has continued to prosper. LVMH has been a great stock.

To be fair French Minimum wage has risen recently quite sharply.

But only in line with CPI.

I use the rich as a proxy for asset prices, but the idea is the same. Voters want more money, and cheaper asset prices, particular housing. In the UK, Labour is campaigning of pretty much exactly that platform, and are heading for a landslide. I am a political neophyte, but understand what voters want. Why do so many “professionals” not get it.

What does this all mean for the US presidential election? Too hard to tell. Markets have been more lacklustre under Biden (which is a good thing politically) and he retains more of an everyman (but very old) demeanour than Trump. If Democrats can paint him as the favourite of corporate America, then Biden will do much better. I suspect that this means the Economist analysis showing that Trump is more likely to win, is probably wrong again. I suspect Biden to outperform, with the election being much closer than expected.

(Full Disclosure: Last year, the Economist advertised for someone to be the British Economics writer. I thought it sounded fun, but doubted I would get the job. I submitted a CV, and a sample article, and was told I would receive a reply in a few weeks. My expectation was maybe a phone call, I hoped to have an interview in their office, but in the end I received nothing - not even a rejection email. Sadly, the Economist recruitment process has gone the same way as their political analysis - subpar. The sample article I wrote became this piece. My disappointment in the Economist may be based on this, but I do think their political analysis is very weak these days.)

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Back when I first started writing this substack, I was greatly influenced by the idea of systemic food inflation leading to rising wages and rising interest rates. The key driver was that China was no longer self sufficient in grain due to structural shortage of land and labour. It suddenly became the world’s biggest importer of corn, and has remained so.

One trade that I thought would capture this shift was a long gold/short treasury trade, GLD/TLT, which has worked a treat.

The problem is that I thought agricultural prices would stay well supported. They have not. Corn prices have fallen dramatically, as have fertiliser and other agricultural commodities.

This has left me in a quandary. If agricultural commodity prices (and for that matter oil and natural gas prices as well) are weak, then surely, I should reverse the GLD/TLT trade? Deflation must be more likely. When we look at flows into GLD and TLT that is the way the investor community is thinking, even if price action is the other way.

Food production was a constraint that I could see in China, and I thought would be made worse by the Russian war in Ukraine. But price action in agricultural markets and energy markets have proved me wrong. And yet GLD/TLT continues to trade well. Following the maxim that market price is truth, I have tried to let the market tell me why GLD/TLT is working.

The other day I saw my wife had this photo on her lock screen. I asked her why she had this photo - the double chin makes me look terrible in this photo in my view. She replied, “Oh no - this is a wonderful photo - it sums up all the things I love about you.” This was not the only photo that we had disagreed about for the same reason recently. I wondered why our views differed so much. I gave it some thought - and the answer is that you can choose who you love but you can't choose how they love you. In this case, I wanted my wife to love photos that at least make me look fit an youthful. In my mind, the photo below should be her lock screen!

I would prefer to think she still sees me as the young buck when we first met. Of course this is just delusion on my part. But my delusion is seemingly shared by many men. When I see a middle aged man in lycra (MAMIL), they are obviously suffering from a far worse version of my own wish to still be seen as a young fit man. It fails. No one - I repeat no one - wants to see middle aged men on bikes in their cycle gear, and yet somehow they convince themselves it’s a good idea.

What is the corporate version of being loved, but not being able to choose how you are loved? I think the best example in recent years in Meta and Mark Zuckerberg. First of all, Meta is wildly successful, with over US 1 trillion market capitalisation. It is also one of the few tech companies where the founder is still the CEO. In my view, the market loves Meta because as a company it recklessly collected personal details, happily breaks rules and regulations, ruthlessly acquired competitors, and aggressively priced advertising, and shamelessly copied competitor ideas. I think markets see it as part of an online advertising cartel. Now a few years ago in a moment of middle age lycra wearing delusion, Mark Zuckerberg, changed the name to Meta, and declared that like a youthful start up, they were going to pour money into augmented reality and dominated this new untested market. The share price of Meta fell 77%.

Mark Zuckerberg changed strategy, and stopped acting like a start up, and fully adopted the cartel pricing, and capital return strategies of his peers, and has been rewarded with a US 1 trillion plus market capitalisation. GE was a leading industrial company, that then decided it was a finance company, with predictably bad outcomes.

My advice to all my peers is to lean into what other people love about you, not what you think they should love about you. We all have common sense, and we are all slightly delusional about ourselves, which as true for CEOs as it is for lowly substack writers.

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I often describe myself as lazy - although this is not quite the right word. The more correct word would be efficient. I tend to calibrate effort to potential reward. Back in 2011, the entire financial community was convinced that inflation was going to surge, and if anything, there was a preference for commodities over financial assets. At the time, China was obviously heading for trouble, and policy in the West was deflationary. It was a no-brainer trade to be long bonds and short equity, and go round marketing myself as the most bearish fund manager in the world. I was basically playing two trends - one that bond yields were going to remain in a down trend, which continued to be true until 2020.

The other trend was that the Chinese stock market (and commodities) was going to disappoint.

At the time, I had a clear idea of the end game - China devaluing, particularly against Yen, just as the Koreans had done in 1998 and 2008. This would be the signal of the ultimate deflationary bust. In 2016, and again in 2020 we got close, but in both cases, the Yuan held is value. I was targeting a level of 10 on this cross rate, but the yuan weakness reversed in 2016 (circled below), and then again in 2020. I knew this trade was done, and the world was a different place to the one I had grown up in. I did not really have a clear view on where markets were going, or what the end game was. It was time to take a break.

As you can tell from above, I looked to currencies as a good indicator for risk, and for trading, and I always felt that Yen was undervalued - a view that has not really changed that much. The point of this, is that changing market behaviour, and changing politics has made short selling much more difficult. As I was reading a Bloomberg article on short selling that I was interviewed for, there were some striking graphics. The number of funds has collapsed. I was also surprised that short selling funds did not do better in 2022.

I used to use things like NIIP as timing tool for short selling, but that has also not worked as it used to. Now in my view, successful short sellers are smarter than average (I am talking my own book), but I DO think Soros is better investor than Buffett, but Buffett is a better business man. Why are short sellers better? To make money shorting, they need to understand the market better than at least 90% of the other people in markets. Stick an average punter in the market, and tell them they can only be long, and they will more than likely make money. Stick the average punter in the market and tell them they can only short, and watch the losses roll in! See chart above. The obvious question then is do I think I understand markets better than 90% of market participants? At the moment, probably yes. Why? Because this market is politically driven, not fundamental driven, and the average fund manager is a political dunce at best, and dogmatic as worst.

Since the GFC, Western governments have slowly taken on corporate risk. Explicitly this happened during Covid, which is hard to argue with. But it has also happened implicitly with clearinghouse reform. For those you without the patience to go through the 20 presentations I have done on this, basically all you need to know is that banks used to price risk, with clearinghouses acting as a useful anonymous market when banks needs to hedge themselves. Regulators moved clearinghouses from a sideshow to the centre of the financial system. Regulators have made clearinghouses the central risk pricing party, but incentivised them to maximise volume, but with no risk of bankruptcy. If you wonder why market volatility has collapsed, clearinghouse reform is a good place to look. Essentially, bankruptcy risk that used to reside at banks, to ensure they priced risk correctly, has now been socialised and guaranteed by governments.

Regulators love it, as it has neutralised the risk of credit crises. Even with the end of QE, corporate credit spreads have remained tight.

With corporate credit markets now backstopped by governments, and bank default risk also backstopped by governments, US corporates in particular have been incentivised to swap equity for debt. Corporate debt has surged.

And share buybacks make sense, even when stock markets are at all time highs. With government guarantee for corporate debt markets, there will never be a need to hold cash for a period when credit markets are closed.

The rise of private equity and private credit also reflect this extension of government balance sheet to the corporate sector. Interestingly, the US government balance sheet extension reminds me greatly of the same guarantees that AIG was issuing on MBS. Without AIG and its balance sheet extension, the GFC would have never been possible. What is really interesting about AIG, is that its equity began underperforming the US market in 2004, well before the broader markets topped out. Credit markets took longer to signal problems.

When I look at the current price action of gold versus long dated treasuries, the market knows that US treasuries are not a “safe asset”. Just as equity investors knew that AIG was not a safe asset. I suspect that some people will feel this is a stretch, but the logic of it is pretty sound. The profit seeking nature of capitalism is always looking to exploit any mispricing. AIG credit rating was mispriced, and MBS industry flourished off it. US treasury risk is mispriced, and the entire US corporate sector is flourishing off it. Here is where it get interesting. AIG extended its balance sheet, as its managers did not know any better. The US government has extended its balance sheet, because it took the view that US voters were tired of austerity, and love strong stock markets , and that the wealth effect was a tried and tested vote winner. Politicians do what politicians do and took a political not financial calculation. The problem, which is increasingly obvious, is that politicians are very wrong about the vote winning potential of asset inflation.

The FTSE is at all time highs, and the Tories are heading for annihilation. Sensex is at all time highs, and Modi suffered a significant political reversal. S&P 500 is at all time highs, and Biden is fighting for re-election. The list goes on and on. Conversely in Mexico, ALMO’s chosen successor has romped home in elections. To make an incredibly obvious point, rampant asset inflation, rising income inequality, the perceptions of being in corporate pockets is now a VOTE LOSER. I can see it, clearly, and you dear reader should also see it clearly. So the political winds are changing. And the market is reflecting this in the changing fortunes of gold versus treasuries. The market is trying to push governments to cut its guarantees. But my guess is politically, cutting guarantees to corporates and for asset markets is much more likely than cutting guarantees to workers.

So this has left me with two options that will allow me to have the wind at my back. One is to be a left wing populist railing against big business and their tax shenanigans. I could easily start publishing a policy suite of ideas to make US corporates pay appropriate levels of tax. They range from recognising Ireland as a tax haven and cancelling the tax treaty we have it, or proposing asymmetrical regulation against any large corporate that operates in the UK but pays no tax. Other ideas would be a levy on digital data collection by non-domiciled corporates are just a few ideas. The problem is that UK politics is an ugly business, and I love my family too much to subject them to that.

So this leaves option 2 - start a hedge fund looking to short companies about to lose politically. For me, its easy to see that “good” politicians (i.e. those that know how to win elections) - will avoid any austerity, and start going after corporates for more tax and wage increases. Or as I put in a recent post, its time to leave a horse head in the bed for large corporates. Oddly enough, Horse Head Capital seems like apposite name for this venture. Seeing Bill Ackman do a stake sale, and potential IPO of his business makes me think smart money is seeing the political winds changes as well. Time to push the hedge fund button.

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I used to get asked by young fund managers for advice in making it in the hedge fund industry. I always gave the same advice. There are two key jobs, making money, and raising money. Of the two, the second is the most important. Most young managers think of themselves as proto-Warren Buffett’s, and just want to focus on investing. I then point out, as great as an investor that Warren Buffett is, he also solved the raising capital part of the business by buying an insurance company, and investing “the float”. Without this captive capital base, Berkshire Hathaway would be a forced seller of assets in the GFC just like all other long biased fund managers.

Most fund managers are terrible presenters, which is why they hire large sales teams to do the talking for them. Of all the fund managers I have seen present, I would say Bill Ackman is one of the best. He is very good at building rapport with allocators, and very good at explaining his ideas. As an investor he has generally outperformed the market, except for the period from 2015 to 2017.

This period of underperfomance was driven by Valeant Pharmaceuticals, which was covered in the Netflix Dirty Money series. Valeant Pharmaceuticals was the biggest corporate fatality of the generic drug scam that Martin Shkreli (pharma bro) was famous for. Valeant is now listed as Bausch Health Cos - the loss of value was phenomenal, but Ackman also rode the escalator up on Valeant, which led to him having outstanding performance in 2014.

It was after this period of outperformance that Ackman sought to raise “permanent capital” in the form a closed fund listed in London and Amsterdam. The raising of permanent capital was close to the top of performance, and the problems with Valeant saw the Pershing Square Holdings perform poorly, losing half its value, but investors that held on have been reward with excellent performance over the last 5 years.

Ackman tends to run a concentrated and transparent portfolio. His big winner recently has been Chipotle, but he also has a large position in Restaurant Brands International.

Chipotle has been a consistent winner for Ackman. As I have pointed out a few times, I personally have found the trends in US fast food industry very difficult to read, but to Ackman’s credit, he bought into Chipotle when the business was suffering due to a salmonella outbreak, and has reaped the rewards.

Ackman is in the news as he plans to launch another closed end fund for US retail investors, with a planned size of USD 25bn, and has sold a 10% stake in the firm for US 1bn. If, and this is a big if, he successful raises the US 25bn for the closed end fund, this would value the firm at around 22% of AUM. (Current assets of USD 19bn, plus prospective USD 25bn, gives us USD 44bn, with an implied business valuation of USD 10bn). This is punchy, but inline with other listed alternative asset managers. That he sold the stake in the firm before actually raising the money underlies how great a salesman he is. But I do wonder, Pershing Capital has been in operation since 2004, a period of fundamental low interest rates. Fed Fund rates have been below 2% for most of this time, in contrast to the 1990s and 1980s.

In my pro-labour view of the world, high interest rates are here to stay. Is Dollar Bill timing an exit to perfection? Looks like it to me.

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I made some mid-month changes to the portfolio, which generally worked I think. I plan to quickly go over the portfolio performance, and then look at peculiar idea, that the S&P 500 is the risk free asset, rather than treasuries. It makes recent market performance easier to understand.

Theft and extortion are both ugly things. But while they may seem the same, they are very different things. Extortion you are buying a service, usually protection, and often protection from the very people you are paying, but it is still a service. Theft, you get nothing back. Some people will tell you that governments give nothing back, but if you live in a rich peaceful nation where the average life expectancy is over 70, this this is plainly not true. And where governments do not work properly, instead of paying taxes you need to pay for security yourself. So I personally like to think of taxes as institutionalised extortion.

In 1970s, it was easy to characterise the US as been bankrupt. The currency was weak, and interest rates were high. But you could not see anything particularly wrong with the Federal government spending. Most of the 1970s, the US fiscal deficit was less than 2% of GDP, and with inflation at 10% would imply a shrinking burden.

That is government debt to GDP ratio in the 1970s was falling, and at very low percentage of GDP.

Extortion is an ugly word, but it works, and is the underlying principal under a large amount of market capitalisation. Often when tech types start talk about “monetisation”, you could swap the word “extortion” and you would actually have more clarity on the business model. Google "monetise” their search business by relegating non-payers to the bottom of the first page of search results, or even the second page. Amazon “monetise” their business by putting non-ad paying business at the bottom of their search results. Apple “monetise” their product by making it hard to impossible to use apps that don’t come through their app store (I note when trying to write a Substack note on my iPad is much more difficult for some reason - often freezing. That Apple does not get is usually 30% cut from Substack is probably the reason). FDR, to end deflation offered a deal to US corporates. The government offered legal protection from competition, as long as corporates raised prices and wages. This included tariffs and other regulations. But after World War II, the US began to cut tariffs to help Europe and Japan rebuild.

US corporates were paying high taxes, but without getting any political protection. So in the late 1970s, Reagan and Thatcher offered a new political deal, less tax and less government spending, which is exactly what voters wanted. Over the years, the ability of governments to “extort” tax has been greatly reduced. IRS has been gradually defunded. If anything the type of people that would have worked at the IRS extorting tax revenues have not jumped ship to corporates to avoid paying tax.

When I look at the US, a large number of “extortion” led business models are not heavily reliant on government protection. The US drug industry is particularly reliant on the US not using Medicare to force lower pricing. US tech industry has benefited from government bans on Chinese competition. US tax policy benefits tech and drug companies dramatically. This is not a comprehensive list, but most of the largest market cap companies now rely on very supportive government policy. So we have the reverse of the 1970s, where US corporates benefit from government protection, but pay very little tax. The problem here is that the US government interest bill is starting to go up dramatically.

Extortion only works if people are afraid to not pay. China sent the boys around to its big tech - and I can guarantee you that Chinese tech probably over pay their tax bills.

Personally I think it well over due for a strategic horse head to be place in corporate America’s bed.

Time to sent the boys round to US big tech and pharma in my view. They are not holding up their side of the deal.

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I had been wanting to do the Kumano Kodo walk for some time. Its an old Buddhist pilgrimage network of trails in Wakayama prefecture, about 2 hours south of Osaka. With almost anything that I want to do these days, I knew that I just need to book the dates when the opportunity presented itself, and then pray that nothing came up that would force me to cancel.

A number of things conspired to make this a solo trek. I booked my flights to Japan relatively late, and when I went to the main website to book accommodation for the trek, I was told that they were no longer taking requests due to demand. I knew this would be my only chance to do this for the foreseeable future, so in a blind panic I started directly emailing every guesthouse and hostel on the trail that I could find. I found a few places so stay, so I booked them as “safeties” while I tried to find better accommodation options. In reality, even the safety options started to get fully booked out, so in the end I was left staying in the places that I had booked in desperation. While I had no problem staying in these places, I felt like taking someone to Japan for the first time and making them stay in random hostels and farmhouses would be asking too much. I also felt with everywhere booking out, the trail would be super busy, and I would have no trouble making friends. In the end, I left London alone. When I got to Japan I spent a couple of days with friends and family, before getting the 4 hour train ride to Shingu. After seeing the main temples there, I got an early night, and bright and early, I set off from Shingu (see map above) the next day. I should have perhaps realised I was going the wrong way when Google Maps sent me through this tunnel.

But when I got to the other side, it opened out to this beautiful vista. So I ignored the fact there was no one else walking on this road, or that I had seen a single sign post stating this was the Kumano Kodo, and trusted Google Maps. Even if I had twigged that I was not walking on the Kumano Kodo, my accommodation for the night was in this direction, so I did not feel I was in a position to change plans, even as I had a nagging suspicion I had made a big mistake.

Following the trail that was there, rather than the one I wanted to, eventually led me to this waterfall - one of the top 100 waterfalls in the country apparently! But by then I was stuck. There were no trails or paths that went any further, and only narrow tunnels with trucks passing through. I knew I was stuck, and in a quirky Japanese way, the moment I knew I needed some help, a Japanese farmer appeared out of nowhere, and gave me a lift up the road. Japanese are a bit like Brits in that way - they know you are probably lost, but won’t offer to help you out until you look like you asking for help! Americans and Australians will more likely come out and tell you directly you are in the wrong place.

That night, when I finally go to Mataoina Guesthouse, I sat down and looked more closely at the maps. There was no staff or other guests at this guesthouse - I had the place all to myself (this also happened in my modern hostel in Shingu - no staff and everything done remotely). What I realised was that the river I was walking next to was the Kumano Kodo, which is why it was marked on the map, but there was no path. As pilgrims used to come down the river, most people travelled form West to East, so I was doing the walk backwards. But after a long consultation with the maps, and the internet, it seemed that there was a path into the mountains only a short bus ride down the road. And this was a real path, not a river, or a Google map phantom. I finally was back on track, and likely to make friends, or so I thought.

Bright an early in the morning I got the first bus to the trailhead. I cannot tell you how excited I was to see a bus full of walkers with backpacks when I got on the bus! Here we go, my new travel buddies! To my surprise, I was the only person to get off the bus at the beginning of the trail head. My bus companions were going somewhere, but it was not the same place as me! Regardless, I saw my first sign for the Kumano Kodo, and I was going to follow it!

As I set off, I became slightly concerned again. The trail was not very heavily used, and almost invisible at certain points. I again did not see another hiker or trekker. I was wondering if I would ever see anyone on my trek. It was also a very steep climb, on a very warm day. I began to wonder if I had enough water, or food. I had left early, so no shops had been open before I left the main highway.

After a few hours of walking and climbing in solitude, I eventually joined the main path. Then I saw many walkers, but all walking the opposite direction to me. Unlike the paths I had been on, this path was wide, well trodden and clearly signposted. I suddenly realised that the centralised booking system that everyone used would ensure that everyone would walk in the same direction. For awhile I thought about the merits of a system that encourages everyone to take the best path. Optimisation and coordination means we get what we need, but at the loss of individualism and adventure. It made me reflect on the difference between passive and active investing. Passive been the safe, well worn path that everyone else travels on, while active being the lonely path, easy to get lost, and more likely to be filled with unforeseen dangers. For most people, they just want to get where they need to get, and the main path (passive), will always be right for them, but for others the path less travelled will always call to them, and that is me. I continued to travel the main path, and eventually made it to my hostel in a hot spring town, Yunomine.

This was the first time I had stayed in a hostel for over 20 years, and was far nicer than any hostel I had stayed in before. It even had its own outdoor Onsen!

One thing that was really struck about the hostel, was that a lot of the people doing the Kumano Kodo were not there to take in the scenery, or enjoy the hotsprings, or even experience Japanese culture. There were a lot of people there to complete the stamps that proved they had completed the pilgrimage, and were now eligible for all the merchandise available for anyone that completed Kumano Kodo and Way of St. James. I was reminded of various graduates I have met who have completed the CFA course before even starting work in finance. I guess I am getting too old and cynical.

At this point, I was hyped to be back on track. But this was making another huge mistake. The next day rain was forecast, with the afternoon forecast for heavy rain. I woke up at 5.30AM, had breakfast, and then set off to get to my final accommodation as soon as possible. I left with two bottles of water, but no food, assuming that just like the day before, I would be able to get food and water at temples on the way. This was a mistake. In this section of the Kumano Kodo, they try and make it as authentic as possible, with no stores or vending machines. I was about 4 hours in when I asked some passing Australians if there was anywhere to buy food ahead. They said no, I would need to go much further to get food and water. They gave me some gummi bears and then moved on.

It has been a long time since I have been that hungry. As I passed people, I would look at what food they had, and wonder if I could ask for some. They say that civilizational collapse if only ever two hungry days away, and at that moment I felt it. As I walked in the wet and the cold, with hunger and thirst gnawing away at me, and fatigue settling into my body, I felt more alive than I have felt for a long time. The mountain climbs melted away into a trance, as I focused on my breathing, and placing one foot after another.

Finally, after 8 hours of walking, and having fully exhausted my water supply, I came across a store of sorts. An oddly sexualized Pinocchio offered cans of soft drink, in exchange for 100 yen coins in his satchel. I happily enjoyed Pinocchio’s juicy offerings.

I finally made it to the most high end accommodation that I had managed to book and after a peaceful night, I stormed home the final few miles to be able to make it back to Osaka for a night out.

I have not backpacked or trekked by myself since I was 26. I had forgotten the freedom of arriving somewhere, and then leaving when you were ready, and not giving anyone else any thought or consideration. Eating when I want, sleeping when I want, and being alone with my thoughts for as long as I want were all such treats. But what I really took from the whole trip is that the biggest difference between old and young is that the young can be enthusiastic about almost anything, but I only bring my A-game for things that I really want to do. And that is ultimately the secret to everything in life, working out what you really want to do. Solve that, and everything else solves itself. And I think spending time alone really helps you focus on what you want, not what the world thinks you want.

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I have been contemplating the nature of American capitalism for a while now. To my mind, “the rules” that market used to work with have changed. Industrial policy, capital controls, and big government are all okay, after being verboten for many years. But the thing is, that even though all these rules have now being broken, as long as American capitalism is creating wealth, then all is good. S&P 500 at all time highs suggests to me that these policies will continue.

When I look at the great policy shifts in the US, they have always happened after a period of lacklustre market returns. Or when American capitalism is not able to “create wealth”. The long period of sideways markets during the Great Depression gave way to pro-labour, and full employment policy changes in the 1940s to 1960s.

The stagnation of the 1960s and 1970s gave way to pro-capital policies of the 1980s, and the upturn in markets again.

The lesson from above is that whatever the barrier to wealth creation that has existed in the US, American capitalism will find a way to overcome it. So Warren Buffett style, always long the market has been a super successful strategy. But my interest is in understanding what causes American capitalism to fail in the first place. What goes wrong so that policy needs to change? First of all, what American capitalism always needs is a schmuck.

I spent the last week in Japan hiking the Kumano Kodo. It was great - but I will do a separate post on this. On almost every currency measure you can find, Japanese yen comes up cheap. This long dated BOJ measure has the Yen back at levels pre 1985 Plaza accord, which saw the Yen skyrocket in value. The temptation to be long Yen in strong, but since 2020, when the Yen also looked cheap, it has been wrong.

I have discussed earlier in a world of rising tariffs and industrial policy, the Yen might not be the same currency it was. One big example of this is that Mexico does better than Japan or China under current trade set up with the US, and Mexican peso has massively outperformed Yen. In other words, politics matter, and Japan is not a political winner it was in the 1970s to 2000s anymore. The Yen has given up two decades of gains versus the Peso.

I am a big believer in 現地現物 (Genchi Genbutsu) which basically means go look for yourself. In some way, Japan is unbelievable cheap. So three coffees and a donut from my favourite chain, Mister Donut, was less than 1000 yen (£5) - whereas some places ask for £5 for a coffee in London.

Walking into a convenience store, I was shocked to see a bottle of Jim Beam available for 1500 Yen - £7.50 and Jack Daniels for 2400 Yen - £12. So getting drunk and then dealing with the hangover, is cheap in Japan!

I stayed in various hotels and hostels of wildly varying quality, ranging in price from £30 to £120 a night, so again pretty cheap. But, and you knew there was a but coming, lets take a nominally cheap meal - some Ramen in Osaka at a place called Kamakura. This cost 1140 Yen - bit less than £6 and was fantastic, so compares very favourable to bad Ramen from Wagamama costing lets say £15.

The problem is that this type of Ramen used to cost 500 to 800 yen, not that long ago. That is prices have risen in Yen terms. Whenever I did not think about the price in pound terms, but thought about it in terms of what it used to cost, I would think that it was quite expensive. Of course if salaries have gone up, then no problem, but I found little evidence of that. Walking abound Namba in Osaka where I used to be a barman at nights, I saw this job advert, hiring people at 1100 yen an hour. What is striking is when I was a barman, I was paid 1000 yen an hour, and that was 30 years ago.

The really tempting thing to say is that BOJ has impoverished Japanese workers for the benefit of tourists, and has had no meaningful benefit to Japanese citizens. But that would probably be a lie. I was out late on a Monday night in Osaka, something I did lot of back in the 1990s, and I have never seen Namba busier at 2AM - and not just tourists, but locals were out in force, particularly young Japanese. Namba is the home of the Glico man - and very popular on TikTok.

Japan seems to have a growth model of some sorts now. Its hard to see tourism numbers dropping.

And with Japanese prices rising to catch up with foreign prices, inflation seems to be entrenched, and likely to accelerate as wages are lagging far behind. In this “new growth model” yen appreciation seems more unlikely, and inflation more likely. Long yen seems like the new widowmaker trade, and the old widowmaker trade of short JGBs seems like a winner to me.

Agreeing exactly with what markets are trying to tell you tends to be a winning trade in my book. So is Japan cheap? For tourists yes, but for locals no - but rather than implying yen strength, I think it implies rising inflation. Short JGBs looks the trade.

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